These days when you need to obtain a loan from your bank you’ll definitely have to offer something as collateral – gone are the days when your signature was adequate security for financiers and this in the face of the current tumultuous economic times.
Banks and other lenders will require from you something of significant value that they can sell off to recover their monies in the event that you cannot pay your loan back. Whilst this may sound quite direct, in the loan negotiation process is a contentious issue which has to do with aptly estimating an asset’s collateral value. This is definitely a touchy issue in that even for a new asset offered as collateral and whose value is still as was upon purchase, a bank will attach a significantly lower value to the same. The argument behind such declarations by banks is that such an asset will have to be sold off when you fail to honor your loan repayment and that it will be impossible for them to receive a sum equal to the asset’s value as provided by you. Read on to understand issues about the worth of collaterals and how banks arrive at their lenders’ values.
1The Valuation of Accounts Receivables (A/R)
The value attached to accounts receivables that are not more than 60-90 days old is generally in the range of 50-85%. Accounts receivables are given collateral values towards the high extremes of this range if you mainly sell to businesses and not consumers, or large businesses and not just any business, or indeed many businesses as opposed to just a few. Alternatively, you will receive a lower A/R collateral valuation if you sell to businesses known for high risk, e.g., restaurants, customers with a history of due balances, customers with a habit of making slow payments, and also foreign clients.
2The Meaning of Collateral Value for Inventory
The collateral value for inventory falls anywhere between 10% and 60% of the value indicated on the balance sheet. Lower valuation percentages are awarded for the following situations:
- where there is slow inventory turnover
- whereby your business makes sales in many different locations especially those outside your state
- if the inventory is in a leased facility, although this doesn’t apply if the lender secures the landlord’s waiver
- if the greater portion of the inventory is work-in-progress, i.e., lenders argue that selling off unfinished stuff will be a difficult proposition
- if the inventory is perishable, or requires a specialized storage facility, or is dependent on fashion trends
3Collateral Valuation for Equipment and Furniture
The typical collateral values provided for equipment and furniture is between 10% and 80% of the original value. Values on the lower end of the range are given if w...